Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Lockheed's Peculiar Spin

Ever read a company's press release and feel a bit misled? It just happened to me with defense giant Lockheed Martin(NYSE:LMT), and it makes me question everything that follows.

Let's look at the headlines from Tuesday's third-quarter earnings report. Net earnings rose 39% over the comparable quarter last year. That is good news -- and there are no adjustments to complicate the matter.

Net sales increased 9%. That's good, too.

And there was no Hurricane Katrina damage to account for, unlike the $1 billion that industry No. 2 Northrop Grumman(NYSE:NOC) suffered in a disruption of what had been an excellent year.

But then there's this item from Lockheed: "Generates $893 million in cash from operations in the third quarter." OK, that looks good, but every number until this one had a percentage attached to it. So I scroll down through the press release, and I see that this figure is down from $1.039 billion last year -- a 14% decrease.

I'd try to tell you why that's the case, but the cash flow statement is for only nine months -- the three-month cash-from-operations number is not included. Why is that so, when the company so widely publishes this number? In fairness, the omission may amount to nothing -- but I really can't understand why the company would omit it.

Also not getting written coverage is the backlog, which appears in the very last table at the very end of the very long press release. Backlog is down 6.8%. The big factor here is a $6.1 billion (20%) decrease at Aeronautics. The press release touts that sales, profits, and margins all rose at Aeronautics. But where are the words explaining the declining order backlog, which, in this business dominated by long-term contracts, is falling? This worries me a bit, since companies such as Lockheed are customarily locked into pretty long-term contracts. From all I can tell, I don't think new revenue generally pops up too frequently.

On the earnings front, the numbers are excellent. Diluted earnings per share for 2005, which were projected to be $3.00 to $3.25 at this time last year, are now forecast to be $3.85 to $3.95 a share. Earnings have been inflated by $0.09 because of adjustments.

For 2006, the company sees earnings of $4.00 to $4.25 -- another sound performance based on a modest increase in sales. But in the back on my mind, I can't help wondering, "What about the decline in the backlog?" Let's call me a skeptic about 2006.

Skepticism aside, the company's stock seems reasonably priced when compared with its peers. Analysts expect Lockheed to grow earnings by 11.5% a year for the next five years, and the stock trades for 14.5 times forward earnings. Competitors Raytheon(NYSE:RTN) and Boeing(NYSE:BA) are expected to grow earnings at 12% a year yet sell for 15.2 and 20.2 times forward earnings, respectively.

Are you looking for great companies selling for less than intrinsic value? If so, start up a free trial subscription to The Motley Fool'sInside Valuenewsletter.